2 Beaten-Down Stocks to Buy on the Dip

It won't come as a surprise to anyone to hear that quite a few quality stocks have performed terribly this year. Some have encountered company-specific problems, others have been swept up in the market's volatility, and for others still, it's a combination of the two.

While broader equities may remain unpredictable in the short term, now might be as good a time as any to pick up shares of top companies on the dip. Novo Nordisk (NYSE: NVO) and Cava Group (NYSE: CAVA) are excellent choices.

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1. Novo Nordisk

Novo Nordisk's shares have significantly lagged the market in the past year due to a series of issues. The Denmark-based drugmaker faced significant clinical setbacks while its main competitor in the market for diabetes and obesity medicines, Eli Lilly, continued to record critical clinical wins.

Furthermore, Novo Nordisk's financial results, though strong compared to most of its similarly sized peers, failed to meet investors' and analysts' expectations. You might argue that Novo Nordisk's sell-off over the past 12 months was justified, but its shares now look far more attractive.

The healthcare giant has a forward price-to-earnings (P/E) ratio of 18 as of this writing, down from more than 40 a year ago; the average for the industry is 15.8.

Image source: Getty Images.

It's impossible to predict how Novo Nordisk will perform in the short run. Between trade wars and looming economic problems, the company may face additional issues beyond its control that could sink its share price. But for investors willing to hold onto the stock for a while, Novo Nordisk is a great pick.

Wegovy and Ozempic, the company's obesity and diabetes medicines, continue to perform well. The company is also seeking approval for an oral version of semaglutide (the active ingredient in both drugs) to help counter Eli Lilly's orforglipron, an oral GLP-1 medicine that recently aced a late-stage study.

Novo Nordisk has a deep pipeline in its core area of expertise, with various weight management and obesity candidates across all stages of clinical trials. Its string of disappointing clinical trial results was only so because of its stature and the high expectations placed on the company.

CagriSema, a GLP-1 medicine it developed, produced a mean weight loss of 22.7% in a phase 3 study. That was higher than semaglutide in the same study, and also better than what Eli Lilly's Zepbound delivered in a similar trial -- but it was lower than the 25% management had promised. However, the company's significant experience in developing drugs in this area should help turn things around.

Additionally, Novo Nordisk has a strong dividend program, with a recent forward yield of 2.4%. Its annual dividend per share has more than doubled in the past five years.

Wall Street agrees that Novo Nordisk's shares look undervalued. The company's average price target of $90.98, according to Yahoo! Finance, implies a 30% upside from its current levels. The Street's analysts aren't always right, but in this case, there are good reasons to think Novo Nordisk boasts substantial upside, especially for those focused on the long game. That's why it's worth it to buy its shares on the dip.

2. Cava Group

Cava's terrible performance on the stock market this year hardly reflects the company's financial results. The restaurant chain has been on fire, and the first quarter was no different. Cava's revenue jumped by a strong 28.2% year over year to $328.5 million, with same-store sales up 10.8%, and growth in guest traffic of 7.5%.

So why are Cava's shares dropping despite solid financial results? The answer is valuation. The company's stock isn't cheap. Its forward price-to-sales ratio is 8, four times what's typically considered the start of the undervalued range -- and that's after the pullback it's experienced in recent months.

Cava could remain volatile in the short run, especially given the uncertain near-term outlook. However, for those willing to hold onto its shares for five years or more, it remains a top stock to buy. The company's growth story is just beginning, and it has plenty of expansion opportunities.

In the first quarter, Cava added 15 new restaurants. Yet, its total restaurant count still stands at just 382 across only 26 states. The company it's often compared to, Chipotle Mexican Grill, had almost 3,800 restaurants as of the first quarter and aims to get to 7,000. Cava is a much younger (and smaller) company, and these numbers suggest it has a massive runway for growth ahead.

Meanwhile, though it hasn't been profitable for long, Cava is still making progress on that front. Earnings per share (EPS) came in at $0.22, much higher than the $0.12 reported in the year-ago period. Margins remain strong too -- its restaurant-level profit margin of 25.1% for the quarter was just slightly below the 25.2% reported in the year-ago period; that's a competitive number in an industry not known for juicy margins.

Cava has been successful because customers like what it has to offer: Mediterranean-inspired fast-casual food. The company has another opportunity beyond just expanding its number of stores: It could add more items to its menu. It did just that last year, introducing Mediterranean-inspired grilled steak, with smashing success. Though the associated costs were partly responsible for the slightly lower restaurant-level profit margin, it was well worth it.

In the long run, expect Cava to implement the same winning strategy: opening new restaurants and adding new items to its menu, while maintaining disciplined cost control and strong margins. The stock has crushed the market since it went public in 2023. It could do the same over the long run.

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Prosper Junior Bakiny has positions in Eli Lilly and Novo Nordisk. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and Novo Nordisk and recommends the following options: short June 2025 $55 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.